Sunday, 31 August 2014

‘Raghuram Rajan claims that inflation hurts the poor. It does, but not as harshly as unemployment.’

he uptick in economic growth has been because of Prime Minister Narendra Modi's fast-tracking of decisions, and has taken place despite RBI Governor Raghuram Rajan's obsessive focus on dampening economic performance by an elevated interest rate regime. Although numerous reasons have been brought forward to explain the BJP's poor performance in the just-concluded Assembly bypolls in Karnataka, MP, Punjab and Bihar, a simmering discontent over the economic situation is not among the causes mentioned. However, the fact is that jobless growth has persisted into the NDA's period in office, and this has combined with a perception that the NDA has thus far not differed very much from the UPA in matters of economic policy. Although Prime Minister Modi is very quietly ensuring that tweaks across the spectrum of governance take place, which, over time will vastly improve the delivery of services to the citizen by the state, this has been imperfectly communicated thus far, with the result that the first signs of a loss of confidence are emerging. Should the NDA lose more than a couple of seats in the coming Gujarat and UP assembly by-elections, the stage will be set for anti-Modi groups and parties to coalesce into a united front, the way the anti-Indira groups did in 1977, although this time around, the BJP is still likely to prevail, even if there is a high index of opposition unity. That is, if Raghuram Rajan permits.

The RBI Governor, who was the personal choice in 2012 of both Wall Street as well as (then) Prime Minister Manmohan Singh for his present job, has ignored the imperative of growth and concentrated only on inflation-targeting. In this, he has rigged the game by ensuring that the Wholesale Price Index (WPI) gets replaced by the Consumer Price Index (CPI), which is always higher. Rajan's determination to keep interest rates high was clear by his first saying that a bountiful harvest would cause inflation and so rates needed to be high, and very soon changing that to claim that a bad harvest would boost prices, so interest rates needed to remain elevated. Either way, the Indian consumer and businessperson lose. Buying a car or a house becomes unaffordable for millions, thereby constricting demand. And domestic companies, who pay double digit interest rates for their capital requirements, are made to compete against foreign companies who get loans at derisory rates of bank interest. Acchhe din, all right, but only for FIIs and those making FDI, not for Indians. The manner in which hot money is being chased since the time when Palaniappan Chidambaram was Finance Minister of India, has resulted in those with foreign passports taking loans from banks in the United States or in Europe and investing that money in Indian banks, thereby gaining several points in interest. Rather than go through such a high-cost route, it would have been better for the state to have itself borrowed such funds from banks abroad!

Raghuram Rajan, who seems to be looking at the Managing Directorship of the IMF as his next job, claims that inflation hurts the poor. Indeed it does, but not as harshly as unemployment.

As economists less wedded to Chicago School monetarist dogma than the RBI Governor have pointed out, a somewhat higher rate of inflation is more than bearable if there is double digit growth, whereas to a person who is lacking work, even constant prices are unbearable.

Although the textbooks that he is following so blindly may not agree, in the real world, food inflation is the result of supply and distribution, hence higher interest rates are ineffective in curbing them. And in a context where inflation in manufactured goods and in services has remained low (at about 2%), killing growth in these high-employment sectors through an elevated interest rate policy simply serves Wall Street at the cost of the domestic economy.

Hopefully, the Finance Ministry will at some stage point this out to the RBI Governor, who thus far has been treated as deferentially by the NDA as he was by the UPA.

Rajan is given credit for "stabilising the rupee". The fact is that the currency stabilised immediately after The Sunday Guardian exposed the cabal of short-sellers behind the rupee's fall in value, thereby exposing their speculative assault on the currency.

For too long, India has scant need of a Central bank that looks after the interests of foreign investors at the expense of domestic interests. Rajan needs to accept that central bankers in the countries he admires and whose logic he follows with fealty have ensured ultra-low interest rates.

Unless the RBI Governor switches from a destructive monetarism to the same passion for growth as Prime Minister Narendra Modi has, it is the UPA which will increasingly be smiling at every election held in a country where rigid adherence to Chicago School dogma is killing prospects for the double digit growth the poor of India need and deserve.

he formal and informal meetings scheduled to take place between Prime Minister Shinzo Abe of Japan and visiting Prime Minister Narendra Modi of India have (inter alia) the ambitious aim of breaking Beijing's near-monopoly over the commercial production of the 17 "rare earths". At present, nearly 97% of commercial production of rare earths is located in China or controlled by Chinese companies, including in North Korea, where exploration is ongoing. This, despite China having only a third of global rare earths deposits. Rare earths are core to the production of a wide range of high-technology products, and from the 1970s, the relative position of India (once the world's largest producer of rare earths) has slipped substantially relative to China. In large part, this is because policymakers in New Delhi have neglected the need to give a boost to domestic production, preferring the easier option of importing such minerals, mostly from China. Because of tensions between Tokyo and Beijing, fresh restrictions are being placed on supply of Chinese rare earths to Japanese high-technology enterprises, thereby forcing Tokyo to look to the other Asian giant, India, for its requirements. The first such collaboration is between the Indian Rare Earth Limited (IREL) and Toyota to supply complex raw material to the former's unit in Vizag, Andhra Pradesh.

Because of its near-monopoly over the commercial production of rare earths, China is in a position to deny countries access to rare earths, thereby severely affecting the production of high-technology items. Since Hu Jintao took over as President more than a decade back, China has adopted a dual policy of, (a) seeking to itself make high-tech items rather than simply provide the raw materials for other countries to do so; and (b) capture rare earths deposits, especially in Africa, through commercial deals in countries such as South Africa and Malawi.

Interestingly, Afghanistan is estimated to have huge deposits of rare earths, and Beijing is planning an investment of several tens of billions of dollars in that country. It has hedged its bets by having good relations with both the Pakistan ISI (which mentors the more important offshoots of the Taliban), as well as with the Kabul-based government that is fighting the Taliban. By themselves, neither India nor Japan can hope to match China, but together, the calculation is that in five years, the two countries can free themselves of dependence on Beijing for raw materials for their high-technology industries.

Interestingly, rather than assisting India (and itself) to break free of dependence on China for the supply of rare earths, successive US administrations (including Obama) have sought to slow down and stop Indian production, including through severe sanctions on IREL and such entities. Pressure from Washington is believed to be a key reason why Prime Ministers in India from the 1990s have neglected the rare earths industry, thereby reducing it to relative insignificance. Shockingly, raw materials of great value, such as thorium, have been allowed to be unprotected and subject to smuggling, mostly through ports through which a bribe usually permits almost anything to be taken in or out.

Prime Minister Abe is conscious of the importance of India to the security of Japan, which is why it is expected that a nuclear collaboration agreement will get signed between the two sides. The absence of this and other deliverables was what triggered the postponement by two months of Prime Minister Modi's first visit to Japan. In the meantime, both sides have been at work on a roadmap for transformative ties, that will emphasise not only collaboration in manufacturing but also in defence, education, agricultural processing and culture. A nuclear agreement would open the door for Japanese companies to not only supply power plants to India but would open the door for joint research and development in "safe" technologies based on thorium, a radioactive substance that India has in abundance.

Both India and Japan are keeping watch over the rapid development of high-technology industries in China. Although Beijing has yet to come close to (leave alone match) the US in key sectors such as chip-making, through a process of acquisition of both companies as well as technology, China is close to taking over from Japan the distinction of being Asia's technology leader. A fusion of Indian software and Japanese hardware skills is expected to reverse such a trend, and such issues will be prominent in the discussions between Prime Minister Modi and his Japanese counterpart. Aware of such moves, China is edging closer towards Russia, and is close to finalising exploration deals with that country designed to boost its control over rare earths. Its monopoly over elements essential in the production of more than 700 high-technology items has given China an immense geopolitical advantage, one that Modi and Abe will be looking to reduce as a consequence of a high-technology partnership between India and Japan, crucial to which will be joint self-sufficiency in "rare earths".

Ahead of PM Modi's trip to Japan and Chinese President Xi Jinping's visit to New Delhi, Manjeet Kripalani, Executive Director at Gateway House, speaks to M.D. Nalapat, Director of Geopolitics at Manipal University, on India's strategic maneuverability to increase bilateral trade with both Japan and China.

Wednesday, 27 August 2014

After facing the worst electoral debacle, Congress President Sonia Gandhi and party vice president Rahul Gandhi has decided not to campaign for the Uttar Pradesh bypolls, reports stated on Friday.Even as Rahul has opted out from campaigning in the state, many other top party leaders will be campaigning in the state for the upcoming bypolls, top officials said. According to a list released by the AICC, Rahul's name is missing among the 35 star campaigners for UP bypolls to be held in 11 Assembly constituencies.Surprisingly, party leaders are failing to explain the reason behind the absence of Rahul Gandhi's name from the list. Party sources, however, downplayed it saying that the Congress President, by convention, never campaigns in by-polls.

Tuesday, 26 August 2014

M D Nalapat

Monday, August 25, 2014 - Since he took office a year ago as General Secretary of the Chinese Communist Party (CCP) and President of the Peoples Republic of China (PRC), Xi Jinping has shown that he is as much an innovator as Deng Xiaoping. The architect of modern China - in effect –sanctioned moneymaking by whatever means in his famous statement, that it did not matter if a cat were black or white, so long as it caught mice. Seeing that key elements in the CCP were opposed to the thoroughgoing economic reforms which he favoured, Deng in 1992 went on a tour of coastal areas, encouraging reform and chastising those who saw the new policies as against the sprit of the ruling party.

After this, the CCP fell in line and backed economic reform whole-heartedly, thereby creating the conditions that have made China the world’s second-biggest economy, soon to be the biggest. Unlike the China of Chairman Mao,which was poor and underdeveloped, the country which Xi Jinping took charge of in 2013 is a global powerhouse. But to ensure that such a trajectory continues is a daunting task, but one that General Secretary Xi has decided to carry out, by changing policies where necessary. He has instituted the most comprehensive anti-corruption campaign ever carried out in the PRC, and which has resulted in the jailing and even execution of hundreds of officials, including those at the very top of the policy pyramid.

In economic policy, efforts are being made to ensure that the chokehold of state-owned enterprises over the banking and industrial system is being lessened, so that the immense entrepreneurial talents of the Chinese people can be set free. Should Xi succeed in ensuring a level playing field between state enterprises and their private sector competitors, he may succeed in generating as much growth as (then) Prime Minister Zhu Rongji’s reform of state-owned enterprises did in the close of the 1990s. From ramshackle and inefficient companies,several of China’s state-owned enterprises have become international giants. Should the Chinese private sector get a similar boost this time around,the consequences would be significant. Clearly, Xi would like to see China’s growth continue during the decade that he will be in charge,and to achieve this,he is using diplomacy as a primary instrument. In quick order,President Xi has made visits to Africa and South America,seeing in those continents potential markets which could offset possible slowdown in exports to Europe and the US.

Among the countries that Xi is devoting attention to is India, which has the potential of being a $300 billion market for Chinese goods and services, provided “win-win” programs get carried out in which both countries gain. At present, China has a surplus of $34 billion with India on a trade of $70 billion annually India was the first country that Prime Minister Li Kequiang, on a nod from President Xi, visited after taking charge, and in Brazil, both Prime Minister Narendra Modi and Xi established a cordial relationship, strong enough to ensure that Shanghai and not Mumbai became the headquarters of the BRICS bank, a decision taken unanimously. Hence it is unsurprising that Xi will visit India in three weeks time accompanied by six Cabinet Ministers and more than forty business executives. The expectation is that MoU will get signed during the visit that would begin work on China-specific industrial parks in Gujarat and Maharashtra, two of the most advanced states in India, besides agreements to modernise India’s rail network, where speeds are low and safety less than certain.

The CEOs of Chinese companies are likely to sign agreements with their Indian counterparts so that manufacturing facilities geared towards the export market get built in India, on the lines of the invite given by Prime Minister Modi in his August 15 speech, where he called for manufacturers across the globe to come to India and build in India. Most importantly, it is expected that Chinese banks will enter India in significant measure, thereby diluting the monopoly which banks from the US and the EU have in the country. None of this will be palatable to the US or the EU, or to the numerous influential Indians who push their agenda, but from the start, even as Chief Minister of Gujarat, Modi has accepted that Beijing can be a major factor in nudging growth towards double digits Deng Xiaoping worked hard to make China an indispensable partner for economic development, and succeeded.

Whether it be Japan or the US, Australia or South Korea, a significant chunk of prosperity hinges on trade with China, thereby reducing the risk of armed conflict, no matter how shrill the rhetoric over issues such as the South China sea. Should trade between India and China be both much bigger and more balanced, that would become an effective Confidence Building Mechanism dampening tensions between the two. Prime Minister Modi will need to rein in those in the government who focus on the 10% of the overall Sino-Indian canvas that represents a threat and thereby miss out on the balance 90%,which is an opportunity.

Chairman of the Central Military Council Xi will need to convince the PLA that the best of relations with India is necessary for the maintenance of prosperity in China. At present, the PLA still favours as rigid a policy towards India as the Ministry of Home Affairs in Delhi does towards China, for example by blocking Chinese tourists from coming to India, even though these may bring more than $10 billion in annual revenue. The forthcoming visit of President Xi Jinping to India (after which he will head for Pakistan and Sri Lanka) will be crucial in determining whether the two countries move beyond their fixation on the relatively smaller threat that each is perceived to pose to the other or grasp at the immense opportunity which better relations between Beijing and Delhi can bring.http://pakobserver.net/detailnews.asp?id=250677

Sunday, 24 August 2014

Congress party chief of Kerala V.M. Sudheeran wants to introduce prohibition in stages in the state.

n 10 years' time, Kerala is to be an alcohol-free state, following in the footsteps of Gujarat and Nagaland, which share with Kashmir the distinction of being states where officialdom frowns on tipplers. Those who visit these states are aware that more than a few residents are unable to abstain from their daily glass (of whatever size), and consequently, rely on time-honoured methods in order to gain access to some sort of fiery liquid or the other. Indeed, if Gujarat, which under Narendra Modi has been remarkably well administered, is to emerge as an Indian challenge to Guangzhou, its government needs to accept that human beings are not saints, and that commonplace behaviour prohibited by law will simply move underground (where the dangers to society are much more), rather than disappear. After the experience of Prohibition in the United States between 1920 and 1933, or that in Haryana under Bansi Lal in the latter part of the 1990s, it was hoped that policymakers would realise that enforcing a legal ban on alcohol simply results in an exponential growth of mafias, networks of criminals that specialise in providing bootleg liquor.

In the US, the banning of liquor immediately gave a boost to the Cosa Nostra, which enjoyed a huge spurt in profits as a direct consequence. In Haryana, police persons would accost motorists travelling from the international airport to Gurgaon, searching their luggage for bottles of alcohol, even though these would have been legally acquired through duty free outlets in the airport. A hundred rupee note would usually suffice to ensure a sudden attack of blindness on the part of the defenders of law and order, enabling the guilty motorist to scoot off home, where too he may face the occasional raid, this time, having to pay a considerably higher bribe in order to escape going to jail because of the small stock of whisky, gin and beer that he has kept at home for the occasional party.

Let it be admitted that this columnist has been known to not always refuse an occasional glass of red wine in the evenings, despite the warning by Moral Police (and in a few states by the regular police) that such indulgence may subject him to eternal damnation, although such dire prophecies may not be accurate. Let it also be said that he favours the legalisation and sanitisation through regular medical checks of prostitution, and the legalisation of the milder versions of drugs, just as he believes that it is not the responsibility of the state to peek into bedrooms.

Fed by television anchors eager to enforce a morality on the public that few within their own profession would be prepared to embrace, India has seen the rise of a high-decibel army of Moral Police, demanding jail even for those "guilty" of sneaking an occasional glance at a charming lady. They forget that by targeting such a wide range of human behaviour, as for example under present narcotics laws, they allow the escape of the few individuals who truly need to be focused on and punished: the child molesters and the rapists, several of whom have evaded prison because of the concentration of police attention being on far less consequential deeds, most of which would not count as such in any civilised country.

In the US, the absurd "Three Strikes" law and the India-style penalties even on the milder versions of drugs has meant a ballooning of the prison population and consequent disruption of the social fabric. India ought not to go down such a path. Instead, the country needs to be true to its own heritage of tolerance by adopting laws that accept that human beings have frailties, and that the law should enter only when these endanger others.

Unfortunately, Kerala — long seen as a more progressive state — has begun travelling in a regressive direction. Goaded by Saint Sudheeran, the local Congress party chief, who has taken over the mantle of beatitude from A.K. Antony, the Kerala government is to introduce prohibition in stages. In this, the Congress in Kerala is following the trail blazed by another Morally Policed state run by that party, Maharashtra, whose government wants to shut down bars and even ban dancing, so that the state Home Minister will be given a warm welcome at the hideout of Mullah Omar or Sri Ram Sene boss Pramod Muthalik, should he choose to visit either.

Add this to reports that the Black Money SIT wants Indians to be subjected to still more onerous conditions of travel and the conduct of business, so that only hardened masochists would wish to remain behind in India to conduct their trades or professions.

Factor in the numerous laws passed by the UPA that criminalise vast swathes of behaviour, and the outlook for ever becoming a 21st century country seems dim, unless Narendra Modi can rein in the Moral Police and insist on following through his promise of "Minimum Government, Maximum Governance". Over to the Prime Minister.

rime Minister Manmohan Singh rejected an August 2013 request by senior officials in his government to correct a serious error, dating back over 50 years, in India's official maps. In effect, this oversight in official maps mistakenly gave China control of two Arunachal Pradesh "fishtails" (see map), a territory as large as Sikkim or Goa, and continuously inhabited by Indian citizens. Key officials advising Manmohan Singh confirmed the incident. Although this assertion could not be independently verified, a former official claimed that "the problem with Manmohan Singh was his inability to say no to 10 Janpath". According to him, "Sonia Gandhi took the line that in the interests of good relations with China and Pakistan, we should keep turning the other cheek", and that in the matter of the Arunachal Pradesh map, rectification of Nehru-era maps, which incorrectly omitted both Fishtail 1 and Fishtail 2 from Indian territory, would draw attention to an error committed during the period in office of Jawaharlal Nehru.

"Classification as state secret of papers, which ought to be made public, has been motivated by the zeal of Sonia Gandhi (which has been shared by every Prime Minister of India until Manmohan Singh) to protect the image of Jawaharlal Nehru and other members of the family at the expense of transparency", according to a retired diplomat, who has direct knowledge of key records that show a very different picture of the situation prevailing in those periods than what the scanty flow of released information contains.

The two "fishtail" formations in Arunachal Pradesh were omitted from maps prepared by the Survey of India during the 1960s, although the area has always been under the control of India. No public records exist as to why and how such a significant error was made. In 1962, recognising the fact that this territory was Indian, soldiers from the People's Liberation Army of China, who had occupied the fishtails during November 1962, withdrew after the unilateral ceasefire declared by Beijing that month. "Since then and before, the area within the two fishtails has always been occupied by our troops, as well as by the Mishmi tribe, all of whom are citizens of India. Our claim on the territory is incontestable and our maps ought to have been updated to reflect this," a senior official stated.

Asked as to why official maps did not reflect the fact of the "fishtails" being Indian territory, the reply was that "as the mistake took place during Nehru's time, it was felt that correcting the maps formally would draw attention to this mistake on the part of the then Prime Minister and thereby tarnish his name".

A retired official claimed that "every government has protected Nehru's reputation by refusing to make public facts dating from the 1940s that they saw as damaging to the image of Nehru". He and a former colleague saw Prime Minister Manmohan Singh's 2013 refusal to formally change the map (a decision taken "after consultations with the political authority") as part of the effort to protect the reputation of Jawaharlal Nehru by refusing to make public any details of his failures, including the decision to keep secret the Henderson-Brooks Report on the 1962 war, or to draw attention to Nehru's failures even by the necessary step of rectifying them.

Interestingly, the fact that maps showed the two "fishtails" as being outside Indian territory was, according to a senior (and now retired) official, "brought to the attention of then Home Minister P. Chidambaram by the (then) Director-General of the Indo-Tibetan Border Police (ITBP) in 2010, along with reports of Chinese troops entering the area in 2011 and 2012, but the response was to do nothing".

A senior official active in Team Manmohan added that in April 2013, when Chinese troops set up six large tents deep within the Depsang bulge (near Siachen), "the Prime Minister refused permission to the Army to ensure that the intruders were challenged". Fortunately, Ambassador S. Jaishankar in Beijing was able to persuade the Chinese leadership to get the People's Liberation Army to withdraw from the bulge after 21 days, thereby defusing the situation.

Although this could not be independently confirmed, a former official asserted that both National Security Adviser Shivshankar Menon and RAW chief Alok Joshi pressed for an early rectification of the Indian maps, and that their demand was turned down by Prime Minister Manmohan Singh in August 2013.

A senior official said that "now that there is a new Prime Minister, Government of India should settle ex-servicemen in the regions subject to intrusion by China, including those from local tribes". He pointed out that "this can be done by providing land and money to such settlers". Until such a policy gets tried out, almost the entire territory subject to regular PLA intrusions is uninhabited except for the occasional shepherd. The most recent Chinese military incursion into the "fishtails" was on 13 August 2013, when PLA troops entered 26 kilometres into Indian territory. "In order to show the Chinese that the land is ours, it is essential that inaccuracies in official maps be rectified," a retired official said.

The Line of Actual Control (LOAC) between India and China represents area in the de facto control of both sides after the 1962 border conflict and the subsequent Chinese withdrawal from territory seized by them in that episode. Because of pressure from the Pakistan army, which would like to ensure a continuation of tensions between India and China, the PLA has thus far refused to agree to the delineation of the LOAC, despite the substantial beneficial effects of such a step on Sino-Indian relations. And although China has settled its boundary with Myanmar on the basis of the McMahon Line, Beijing has thus far refused a similar settlement with India. This has led to occasional flare-ups, such as at Nathu La in 1967 and Wangdung in 1987. Absence of an agreed demarcation line carries with it the risk of an exchange of fire and casualties, an occurrence which would damage Sino-Indian relations substantially.

"It was Jawaharlal Nehru who gave away the UN Security Council seat to China when it was offered to India; who gave away Gwadar to Pakistan after the Sultan of Oman offered it to New Delhi for just $1 million; and who handed over the strategically vital Cocos islands to China," a former official pointed out, adding that "his legacy has long paralysed policymakers from taking decisions that would secure India's interests". In his view, the "dereliction of duty showed by the making of maps that omitted huge chunks of Indian territory was a Nehru-era mistake that calls for immediate rectification".

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About Prof. MD Nalapat

Prof. Madhav Das Nalapat (aka MD Nalapat or Monu Nalapat), holds the UNESCO Peace Chair and is Director of the Department of Geopolitics at Manipal University, India. The former Coordinating Editor of the Times of India, he writes extensively on security, policy and international affairs. Prof. Nalapat has no formal role in government, although he is said to influence policy at the highest levels. @MDNalapat

MD Nalapat's anthology 'Indutva' (1999)

In 1999, Har-Anand published Indutva an anthology of MD Nalapat's 1990s columns from the Times of India. The individual columns are posted here, in 1998 and 1999 of the blog archive, though the exact dates of publication are uncertain.